Price elasticity or elasticity coefficient is an economic term that shows the percentage change in quantity demanded due to a change in the price of goods and services. Back to: RESEARCH, ANALYSIS, & DECISION SCIENCE
How is Elasticity Coefficient Used? |
Types of Price Elasticity of Demand | ||
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If the percentage change in quantity demanded divided by the percentage change in price equals: | It is known as: | Which means: |
Infinity | Perfectly elastic | Changes in price result in demand declining to zero |
Greater than 1 | Elastic | Changes in price yield a significant change in demand |
1 | Unitary | Changes in price yield equivalent (percentage) changes in demand |
Less than 1 | Inelastic | Changes in price yield an insignificant change in demand |
0 | Perfectly inelastic | Changes in price yield no change in demand |
Data: Khan Academy
As a rule of thumb, if the quantity of a product demanded or purchased changes more than the price changes, then the product is considered to be elastic (for example, the price goes up by 5%, but the demand falls by 10%).
If the change in quantity purchased is the same as the price change (say, 10% ÷ 10% = 1), then the product is said to have unit (or unitary) price elasticity.
Finally, if the quantity purchased changes less than the price (say, -5% demanded for a +10% change in price), then the product is deemed inelastic.
To calculate the elasticity of demand, consider this example: Suppose that the price of apples falls by 6% from $1.99 a bushel to $1.87 a bushel. In response, grocery shoppers increase their apple purchases by 20%. The elasticity of apples is thus: 0.20 ÷ 0.06 = 3.33. The demand for apples is quite elastic.
Price elasticity of demand is the ratio of the percentage change in quantity demanded of a product to the percentage change in price. Economists employ it to understand how supply and demand change when a product’s price changes.
If a price change for a product causes a substantial change in either its supply or its demand, it is considered elastic. Generally, it means that there are acceptable substitutes for the product. Examples would be cookies, luxury automobiles, and coffee.
If a price change for a product doesn’t lead to much, if any, change in its supply or demand, it is considered inelastic. Generally, it means that the product is considered to be a necessity or a luxury item for addictive constituents. Examples would be gasoline, milk, and iPhones.
Knowing the price elasticity of demand of a good allows someone selling that good to make informed decisions about pricing strategies. This metric provides sellers with information about consumer pricing sensitivity. It is also key for makers of goods to determine manufacturing plans, as well as for governments to assess how to impose taxes on goods.